Return of Scale

Posted in Finance, Accounting and Economics Terms, Total Reads: 270
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Definition: Return of Scale

Return of scale is an important term in production economics. It means the rate of increase in output (production) with respect to the associative increase in input (the factors of production).

 

Governing laws

Return of Scale arises from a firms Production function. The three inter-related laws that explain the concept are:

1. Law of Increasing Return to scale

2. Law of Constant Return to Scale

3. Law of Diminishing Return to Scale

 

These laws are self-explanatory, i.e. when there’s an increase in output with respect to input; it’s Law of Increasing Return to scale. If there’s a proportional increase in output when there’s a same increase in input, it is Law of Constant Return to Scale and so on.

In microeconomics, Return of Scale is a concept that in independent of market conditions or economic decision.

 

Return of Scale v/s Economies of Scale

Economies of scale are essentially the cost deductions obtained from increase in volumes. But, there is a relation between Return of Scale and Economies of Scale. When increasing returns to scale occurs, it results in economies of scale. This is owing to the fact that efficiency increases when organizations progress from small-scale to large-scale production. A loss of efficiency in the production process, even when the production has been expanded, results in decreasing returns to scale. This may occur if the organization becomes too large to be operated as one single entity. In this case, there is no economy of scale.

 

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